PM's economic panel for regulating microfin sector

Prime Minister's economic panel today pitched for a regulatory mechanism for the microfinance sector, which has run into rough weather recently for charging high interest rates and strong-arm loan recovery methods.

The panel also called upon microfinance institutions (MFIs) to reform their business practices.

"Formal regulatory systems will have to be put in place ... The significant expansion (of financial inclusion) can occur from the banking sector but at the same time there is also the role for microfinance institutions (MFIs). They are passing through a very difficult time now," Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said.
    
Speaking on the sidelines of the Microfinance India 2010 summit here, he also called upon MFIs to reform themselves.
    
"They (MFIs) are already linked to the banking system... But if this link is to be strengthened, and if this link is to become a really significant one, the MFIs need to modify some of their lending practices," Rangarajan said.
    
Greater linkage between banks and self-help groups and expansion of the business correspondents model are likely to bring a surge in the microfinance sector, he added.
    
"There is need for multiple systems of operation in the microfinance field. I believe bank self-help group linkage programme has a very important role to play with the addition of business correspondents model," Rangarajan said.
    
Asked if collapse of MFIs will impact the banking sector, he said: "The repercussions on banking will be serious if the MFIs fail. But the MFIs would anyway have to go for reform."
    
Rangarajan's comments come at a time when the Andhra Pradesh government is mulling to put a cap on the interest rates charged by the microfinance companies through a new law.
    
MFIs reportedly charge 24-36 per cent interest.
    
Through an Ordinance promulgated last month, it asked the state MFIs to furnish details of the interest rates being charged by them and their areas of operations. The state government plans to change the ordinance into an Act.
    
Rangarajan also hinted that the liquidity situation in the country may ease over the next few months.
    
"As of now, there is some liquidity tightness in the system. But it may also ease in the second half of the (fiscal) year because there is a fairly large inflow of capital into the country...And the government expenditure also keeps increasing in second half. So this should ease the liquidity situation," he said.
    
Rangarajan said public expenditure generally picks up during the second half and, "therefore, the liquidity (in the) system will increase and also the capital inflows become only stronger from September."